Bulletin

Nucor earnings surge on rising steel prices

Producer sees fourth quarter shipments depressed by imports

By

LauraMandaro

SAN FRANCISCO (MarketWatch) -- Nucor Corp. reported Thursday a 77% jump in earnings despite what the steel producer called a period of "unprecedented volatility," but warned high import levels will depress fourth quarter shipments.

The Charlotte, N.C.-based company's third quarter net earnings climbed to $517.6 million, or $1.68 a share, from $291.9 million or 93 cents a share in the year-ago period.

Results beat an average forecast of $1.56 a share on revenue of $3.88 billion as tracked by Thomson First Call. Earnings also topped the company's September guidance of $1.50 to $1.60 a share.

The company successfully managed through "such challenges as unprecedented volatility and scrap pricing and the market distorting effects of global overcapacity," said Nucor Chairman and Chief Executive Dan DiMicco in an afternoon conference call.

The run-up in steel prices over the last year has benefited Nucor. Its average sale price per ton rose 23% from the year-ago period and 7% from the second quarter.

But global steel production has also built up steam, providing U.S. buyers of steel with a supply of imported metal ordered when supplies were tight plus record levels of inventories.

Nucor's results reflected the impact of these growing steel stockpiles, which have lowered market prices in October.

Shipments to outside customers gained 6% from a year-ago, to 5.6 million tons, but fell 4% from the previous quarter.

Fourth quarter: imports an issue

The company said fourth-quarter earnings and margins should be "strong" but will have lower shipments because of a seasonal slowdown and a draw-down of inventories by its service center - or steel distributor -- customers.

"These high inventories are due in part to the unexpected continued high levels of imports in the third quarter," it said in a statement.

The Metals Service Center Institute said Thursday that absolute inventories of steel at service centers in September had reached their highest level since 1987, while shipments dropped year over year, according to a Credit Suisse note on the subscription report.

The third quarter was a "good quarter, with better than expected pricing offsetting slightly higher than expected scrap costs," said Credit Suisse analyst David Gagliano in a report ahead of the conference call.

But he called the company's outlook "less positive."

Shares closed less than 1% higher to $54.70. They've gained 68% this year.

Cyclical slowing

Steel stocks in general have been rallying this month, helped by a new round of merger activity and news that some big producers, like Arcelor Mittal
MT, -5.45%
are cutting back production as their customers work down bloated stockpiles.

But the steel sector may face worse times ahead, given the risk of a steel glut and waning demand from sectors like the auto industry, said Citigroup analyst John Hill in a note.

"It's too early to sound the 'all-clear' signal," said Hill.

In the call, Nucor executives' worries centered on a "global overcapacity" that it said the Chinese steel industry was largely responsible for creating.

"It's an Achilles' heel of the steel industry globally, not just here in the United States," said DiMicco, who promised to hold China "accountable" at the World Trade Organization to accords restricting government subsidization of industries.

U.S. steel producers like Nucor and U.S. Steel Corp.
X, -2.86%
have charged that low-cost imports from China and other countries have contributed to excess inventories, and they lobbied the federal government this week to extend import tariffs against six countries. See full story.

Citigroup's Hill said investors' anticipation that U.S. steel mergers will follow the latest round of global metals unions may be ill-founded. "We do not see either US Steel
X, -2.86%
or Nucor as natural acquisition targets," Hill said.

Indian steelmaker Tata Steel has said recently that it may buy the U.K.'s Corus Group
CGA, -1.48%
(CS).

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